Police today launched a crackdown on the blackmarket trading of dollars after President Mohamed Nasheed last night declared he would “put a policeman behind every dollar”.
The Maldives has been suffering a crippling dollar shortage for over a year, with most banks in the country sporadically refusing to trade dollars at the official pegged rate of Rf12.85.
Maldivians travelling outside the country and expatriate workers seeking to export their remittances are forced to rely on the unofficial black market, which trades dollars at up to Rf14. Panicked text messages appealing for dollars are circulated whenever emergency medical treatment is required overseas.
Until now authorities have turned a blind eye to the practice, as even many sizeable local businesses have been forced to obtain dollars from unofficial avenues.
Launching the operation, police accused the Maldives Monetary Authority (MMA) of failing to address the problem of foreign currency dealers violating their licenses.
“It has been noticed that the MMA has yet failed to take action, despite the exchange of US dollars in violation of policies, in order to regulate the exchange of US dollars,” police said in a statement.
“Information received as of now reveals that the receipt and reports that should be sent to MMA have not been sent, according to the policies of the MMA in effect. We have also received information that unlicensed dealers are exchanging US dollars against the policies devised by the MMA,” police said.
The first arrest was made today, after a man was arrested in a shop on the tourist strip of Chandhanee Magu for exchanging dollars at higher than the pegged rate.
“The shop was not licensed to carry out transactions related to foreign currency exchange,” Sub-Inspector Ahmed Shiyam told newspaper Haveeru.
The government has levelled blame at MMA Governor Fazeel Najeeb, and called for parliament to dismiss him for failing to respond to the President’s requests for counsel.
A letter from the President requesting Fazeel’s dismissal was read out in parliament today and the matter was sent to the Public Accounts Committee, which will make a recommendation to the floor. Debate on the subject today included proposed limits on carrying foreign currency out of the country.
Earlier this month following initial calls for Fazeel’s dismissal, leader of the opposition-allied People’s Alliance (PA) Abdulla Yameen appeared on Villa TV to defend the MMA governor, insisting that the dollar shortage was not reasonable grounds to dismiss Najeeb.
“The MMA is not responsible for solving the problem of the decreasing amount of dollars coming into Maldives,” he said. “The MMA has to maintain the value of dollars and rufiya… if there is a dollar shortage, what the MMA can do is use their open market operations to borrow from commercial banks and attempt to maintain the value of the dollar.”
If these efforts were unsuccessful, said Yameen, also former Trade Minister and former Chairman of the State Trading Organisation, the only other option would be to “officially devalue the rufiya.”
However, he added, the impact of such a move on the economy had to be carefully considered, or the rufiya would have to be devalued again after six months and the positive effects would be “nominal”.
“From what we can see now, [devaluation] will not be a solution for our structural problems,” he said. “Our biggest structural problem is that our fiscal policy is still recklessly expansionary, it is very much a spending policy without any control. Government expenses are very high and they are not trying to control it.”
Although the Maldives received a high amount of dollars as tourism revenue, “not all these transactions take place in the Maldives.”
“A lot of tour operators for example sell tour packages in Europe and send to the country only what has to be paid to the resort,” he explained.
The other major problem is investor confidence: “If the Maldivian economy is collapsing like this and the dollar shortage is reaching this level, private Maldivian investors will not want to keep their money in the Maldives. They don’t know when, under some law or regulation, the government will give them an IOU and take their money from the bank saying ‘in two years we’ll pay you back in dollars what we’re taking, but now we don’t have cash for foodstuff’ and convert it at the 12.85 rate after a decision by the cabinet – no investor or businessmen will have a guarantee that this won’t happen.”
MMA had not been able to solve the disparity between the rufiya and the dollars because devaluing the rufiya would only lead to spiraling inflation, he said.
An internal problem
Local economists and businesses badly affected by the dollar shortage, such as importers, dispute that the problem is either political or can be solved in such a manner.
A representative for a Dubai-based company supplying resorts in the Maldives explained to Minivan News that while he was required to pay suppliers in dollars and euros, “the resorts try their best to pay in rufiya. Their revenue is acquired in dollars, so they can [sell the dollars] on the open market and pocket the difference.”
“It’s a huge issue for the entire country and makes it very difficult for anyone to import. We’re lucky in that we have a parent company to which we can transfer revenue and which pays centrally,” he said, adding that not all companies operating in the sector were as fortunate.
“We keep a local rufiya account which we use for pay customs payments and incidentals, otherwise the only way to exchange is on the grey market. There you’re looking at Rf14 to the dollar,” he said.
He speculated that the crackdown on the unofficial market could be positive, “as the resorts would lose the incentive to trade dollars into rufiya and any forex coming into the country would stay here.
“But the flip side is that you still can’t change money – it’s an incredible situation when you can’t go into a bank with your Rf12,850 and change it into US$1000. Imagine what would happen in the UK if you walked into RBS (Royal Bank of Scotland) and asked them to change £1000 pounds into dollars and they refused to do it.
“A crackdown on the black market also need laws guaranteeing dollar supplies for banks, with liquidity provided by the government,” he suggested.
“What bothers me is that there’s plenty of dollars coming into the country, but the people in control of the economy seem to be hiding it away.”
A local financial expert working in the private sector, Ahmed Adheeb, told Minivan News that while the crackdown would enforce existing monetary law, “the problem from the point of view of an economist is that the dollar flow is there but the exchange rate is not at the market rate. There have been a lot of dollar fluctuations since it was pegged.”
Adheeb emphasised that building confidence in the rufiya was now “more important than anything else”, and an internal problem innately linked to the country’s high budget deficit.
“We are producing a lot of rufiya to finance the deficit. If the inflow is greater but the exchange rate is not adjusted, that becomes a problem,” he said.
“The government is pumping more rufiya into the economy to finance the deficit than it is earning in dollars. The confidence in the rufiya is not there, and there is no incentive for people to keep their savings in rufiya.”
Adheeb predicted that while the crackdown would limit exchanges on the black market, “there will still be huge demand for dollars.”
“When the black market suffers shortages, we may find ourselves in a situation where we can’t find dollars at all. Even now if I am individual it is difficult to find dollars, because the banks are not supplying. The total solution is for banks to supply to demand.”
The banks, Adheeb said, had significant dollar reserves but found the rate of exchange unacceptable.
A pegged rate had been instrumental in building investor confidence in the tourism sector, Adheeb noted, however it had led to an internal problem that had left the currency vulnerable to global fluctuations in the dollar caused by events such as the Gulf Wars, 2008 recession, rising oil prices, “and now reconstruction in the wake of the Japanese tsunami”.
“If I have savings in dollars, why would I exchange if the rufiya is so volatile?” he asked. “At the same time why is the government raising oil prices? Because of international price increases.”
Foreign investors in the country were already concerned, he noted, because of the difficulty of repatriating profits to the home country.
“Dhiraagu, for instance, is probably having a lot of difficulties repatriating dividends to Cable&Wireless. This can lead to a fall in investor confidence. When that happens, foreign investors will either try to exit or stay away. We will only see foreign investment that earns dollars, such as resorts.”
The problem would soon lead to inflation and difficulties importing essentials such as fuel and medicines, he suggested, and could potentially have a major impact if the State Trading Organisation (the country’s primary importer) found itself unable to acquire foreign currency.
“There is no reason why this should be politicised – it is a national issue, like a tsunami. We need to get together and solve this. I believe the economic outlook for the Maldives is good – the tourism sector is continuing to grow. We can manage this, it should not be a major problem.”
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